Road to nowhere

Why businesses find it so hard to change.

The Policy Paradox

This substack post from the excellent Sam Freedman is a terrific analysis of why apparently good ideas in public policy, with widespread political and public support, can still fail to happen. If you are at all interested in government, you should read it.

As a member of the Moving Tribes gang, though, you will also be interested in retail and consumer businesses and how to lead them. (And if you aren’t a member of the MT gang, now is the time to grab a free subscription!)

It strikes me that there are some really strong analogies between the barriers to change that Freedman’s article describes for politicians and some of the things that stop consumer businesses changing. And that’s a big topic, because the last couple of decades are littered with examples of big retailers who resisted change right up to, and beyond, the point of bankruptcy. Just why businesses ‘choose’ to die rather than evolve is therefore a valuable topic for us to study.

Freedman lists three barriers to policy implementation, which I will crudely summarise as:

• Spending rules - setting apparently arbitrary rules can stop sensible things happening - by fixating on increasing spending on the NHS, for example, we end up squeezing spending on local preventative healthcare which everyone agrees would be better value for money

• Misdiagnosis - for example, the fact that targets (like A&E waiting times) get gamed can lead to calls for them to be scrapped, when in fact the presence of the targets is a powerful driver of change despite any gaming at the margin.

• Fear of the electorate - e.g. council tax revaluation is agreed by everyone to be sensible and long overdue, but because there will be losers as well as winners no-one wants to do it.

Let’s take each of those three in turn and consider how they might be stopping your business from enacting critical, profitable and possibly business-saving changes programmes.

Spending rules - changing the financial lens

Consider a capex request for a new project. An obvious question for those holding the purse strings is ‘Will this pay back?’.

If the project is another instance of something you’ve done many times before (a new store, for example) then that’s a fairly easy question to answer. If, on the other hand, it is a genuine innovation then it is much harder. If we aren’t careful, our financial decision making systems will therefore bias us strongly towards continuing to do what we’ve already done, rather than encouraging innovation and change.

There is, helpfully, a simple flip to the financial evaluation that can help hugely. Instead of adopting the ‘financial guardian’ mindset, if we adopt the ‘venture capital investor’ mindset then we end up asking a different question. Instead of ‘Will this pay back?’, we ask “How much will it cost us to find out if this pays back?". A capital allocation system which takes this kind of risk/reward based approach is much more likely to result in real innovation.

Misdiagnosis - you get what you measure

Our businesses are filled with situations just like the A&E target one. In measuring customer outcomes or NPS, in paying commissions on sales, in running performance evaluation processes and setting pay rises. In all of these cases, there will be gaming of the rules somewhere at the margin.

My LinkedIn feed is awash, for example, with vendors of various customer experience measurement systems shouting about how, because NPS is often gaming by sales people, delivery drivers or service engineers trying to maximise their scores, it is therefore worthless and should be discarded immediately.

But that misses the critical point that implementing (and shouting loudly about) NPS has been associated with really positive changes in customer experience in many parts of many businesses. I can think of dozens of examples just in businesses I’ve worked with.

Why does that happen? Because frankly just the act of putting a target like NPS front and centre for the business changes what people pay attention to. It raises awareness of customer impacting issues and changes the vocabulary the business uses to evaluate its results.

In the end, despite any gaming at the edges, the whole operation is improved by more focus on what matters - how customers feel about the service they get.

Fear - the most powerful block to change

In both my books on retail and consumer business (Reinventing Retail and The Average is Always Wrong) I’ve ended up writing a lot about fear and how to overcome it. In the political sphere that might be fear of the electorate or of the press but in businesses facing existential challenges there are another list of things to be scared about.

Some of those are personal - business change can challenge the value of the experience of older and more senior executives, who might simply not know that much about new-fangled digital or social media technologies. That challenge is often the driver of passive resistance, a “not invented here” mentality or denial, and can be a huge blocker to change.

Others are institutional. Fear of shareholders, lenders and other financial stakeholders, for example, is often a reason why businesses are reluctant to admit to the need for change at all. Telling the people who’ve just spent 20 years funding the growth of your store estate that you don’t need all those stores any more is not easy.

Overcoming barriers and driving change

In conclusion, it is fair to say that driving change in a business is hard. Quite apart from any technological or regulatory barriers, we face much more basic challenges as the measurement systems, financial controls and business processes which have sustained our businesses in the ‘old world’ prove to be barriers to the change that is necessary to enter the new one.

And on top of that come the psychological barriers - fear of change, fear of failure and fear of losing status.

But the good news is that all of these are fixable. The starting point, for any business, is to embrace the realities of these barriers to change and make overcoming them an explicit part of the management conversation. Fear, in particular, does not thrive in sunshine and so part of our role as business leaders is to shine bright light onto fear of change (including, especially, that fear we feel ourselves) and create the conditions in our business that encourage risk-taking, innovation and the embracing of the new.

What do you think - what are the hidden or less obvious barriers to change you see in businesses around you?